Market Research Means Money

June 29, 2009

I recently made a critical mistake in my progression towards business success: I forgot about market research. I had decided that I was going to make some money with an online store. I thought to myself, where should I start? What can I sell? After a bit of brainstorming, I picked a few things that I thought might be good to sell online. I then proceeded to start looking for suppliers. This may seem like a reasonable course of action, but it is not. It is missing a key component of any business plan.
A basic assumption for the purpose of this article is that there is competition involved with any business. Even if you make your own, unique product, similar products will compete against yours. However, the existence of competition is not necessarily bad. The fact that online retailers are selling items similar or identical to your own means that there is demand for your product. Competition is only bad for you, as a retailer, when the market is becoming saturated (or is already at that point).
Check the electronics market for a good example of this principle. Electronics go for rock-bottom prices online because there are so many different stores that sell them. The difference in prices between stores usually comes down to the cost of shipping. The competition in this area is extreme. If retailers cut their prices any lower they won't make enough to survive.

The first person who had the idea to sell VCRs online probably made a killing. Nowadays, nobody makes anything more than a buck or two per unit. For a home-based business, that's not good enough. Today's electronics dealers depend on volume, and very good supply sources, in order to make their money. Generally speaking, small retailers cannot sell at those prices and turn a profit.

In order to be successful it is essential that you know what you're up against, and that means market research.

If you are selecting your products, then you need to know which stores already sell those products. You also need to know how many stores there are, how much they are charging and, if you can find out, how well they are doing. Could you sell for less (if only a little)? What are other ways you could differentiate your store from the rest?

If you already have your product, then you need to know where and how your competitors are advertising. Are they concentrated in one location? Are there good places that they have overlooked? How much is it going to cost to compete with them for prime ad space?

So, you may ask, where do I begin? The answer is Overture. Owned by Yahoo, Overture is one of the largest and most reliable pay-per-click advertising services. Their program can be an extremely effective, but that is something for another day.

What you need for research requires no sign-up and belongs to no program. There are two web tools in the Overture Advertiser Center that can be amazingly useful. The first is the Search Term Suggestion Tool. This tool allows you to look up a keyword, like "digital camera", and find out how many people searched for that term last month. Not only that, but the tool will suggest a list of related terms, like "digital camera review", for your consideration.

The number of searches per term comes from Overture's partners like Yahoo, MSN, AltaVista, CNN, etc. This is critical information because it tells you whether or not people are looking for your product online and, at the same time, shows you how they are searching for it. This indicates a certain demand for your product.

You may be able to judge the size of the demand, to a certain degree, by the number of searches for your terms. For example (numbers taken at time of writing and may not reflect current rates):

Digital Camera – 1,337,422 (high interest)

Used Car – 890,346

Mountain Bike – 133,553

Blender – 26,648

Bubble Gum Machine – 1,502

Chapstick Raspberry Vanilla – 25 (very low interest)

Keep in mind that users searching for 'digital camera' are not necessarily shopping for one. They may just want information such as reviews or feature lists. It is also good to remember that if people are searching on Yahoo and MSN, as in the case of digital cameras, then you can safely assume that even more people are searching for the same things on Google.

The second tool Overture provides is the View Bids Tool. This tool allows you to take the keywords that you found with the term suggestion tool and see how many ads there are for each term and how high the bids are (in order to be listed on top of your competition you must place a higher bid for the term you want). This tool can help you judge your competition.

For example, at the time of this writing there are 131 ads associated with the term digital camera. The top bid is 79 cents per click. Bubble gum machine has 13 ads with a top bid of 49 cents. Chapstick Raspberry Vanilla, not surprisingly, has no bids on the term which means that the top spot could be purchased for the minimum price of 10 cents per click.

After you have your information from Overture, Google is your likely next step. To my knowledge, Google does not provide any analysis tools to the general public, though information is available to registered advertisers. Despite this limitation, it is easy to find your competition on Google. Simply enter your search term and check the right side of the results screen. The first page should show the top advertisers. Checking subsequent pages will reveal the entire list of advertisers for that term.

Tip: Sometimes advertisers may be targeting your term, but not selling your product. Read through the ads and visit the sites to get a more accurate idea of your direct competitors.

The natural results (the normal, non-ad results) of your search are important as well. Check those to see the top ranked sites in your market. Those sites are probably there because they employ search engine optimization (SEO) techniques. Users are much more likely to click on the natural results than they are the ads. The stores at the top of the list are likely to be well established and may represent some solid competition.

Visit your competitor's web sites and see what they are selling. Check for site quality, organization, ease of use and amount of products sold. Perhaps they sell your product, but it is lost in a vast sea of other related merchandise. That means better chances for your niche store. Maybe their site is ugly or hard to navigate. These are points at which you could gain an advantage over your rivals. Checking other sites will also give you ideas about how to run your own store.

The third step in this process is to check out Yahoo! Shopping. Yahoo! hosts what is known as an online mall. That is, retailers setup stores with Yahoo!'s services and are then included in Yahoo! Shopping's listings. This can be a good way to get fast traffic. For market research, it means easy access to competitor sites. On the Yahoo! Shopping main page, do a search for your product (Braun blenders for example). The results will show sponsored ads and normal listings. The sponsored ads come from Overture, so you should already be familiar with those.

The normal listings come from a combination of Yahoo! Product Submit results and Yahoo!'s web-crawler search database. What is important in this list is actually displayed just below the top sponsor listings and just above the normal listings. There should be two numbers: the number of products found and the number of stores they were found in. For 'Braun blenders' there were 989 matches from 76 stores (at time of writing). Those numbers give you an indication of how many stores you're up against.

Note: If there are too many matches, the number of stores will not be displayed (ex. 'sony dvd player' yields 3,660 matches). Of course, numbers that high shout, "big competition," even without store numbers.

Here again you have the opportunity to scope out competing stores. The thorough researcher would get their names and site locations. This may seem time consuming, and it is, but it will help with future research.

Our final recommendation is to visit eBay. Once there, find the eBay Stores area (located in the Specialty Sites box on the homepage at time of writing). Enter your search term to see how many eBay stores are selling your product. 'Braun blenders' shows ten items in eBay stores (not bad compared to Yahoo!). In addition, the search may show regular listings below the store results. These results should give you some idea of the popularity of your product as well as the feasibility of selling it on eBay.

Quick Recap:

Overture (free analysis tools)

Google (ads and natural results)

Yahoo! Shopping (number of stores)

eBay Stores (same deal)

Remember, some competition is good because it shows that there is an interest in your product. Too much competition is bad because it means low profitability. The spot where you can make good money is somewhere in between (most likely on the low end of the competition scale). Unfortunately, I know of no exact way to calculate your chances of success. For those who can afford it, hiring a market research professional might help considerably with that calculation. In any case, a solid business plan built on thorough market research will certainly boost your chances significantly.

About The Author

Jason Carr is a small business owner, dedicated student of e-commerce strategy, and producer of BeginBiz, an online resource for those looking to start an internet business.